As we move closer to a global economy, there is a trend among smaller, less economically developed countries to follow Switzerland’s lead to legislate measures to attract foreign investment money to their economy. As a result new financial opportunities are opening to those who are willing to take advantage of them.
The global economy is experiencing exponential growth because of the Internet. The ease and fluidness of account access through the Internet has made it possible to seamlessly bank both and invest domestically and offshore: move funds, check balances, write e-checks, make payments, transfer money between accounts, and purchase investment options. Offshore banking is now competing successfully with domestic financial institutions.
There is no real mystery to offshore banks: they provide the same services as do domestic banks, just not inside USA boundaries… which is why they are referred to as “offshore.” Often times they are either affiliated with or are subsidiaries of a domestic bank that you may already be doing business with.
Choosing an offshore bank:
The first step in deciding which offshore bank will best meet your needs is to determine your objectives. This means a straight look at assessing your needs. In order to talk intelligently about why you want to open an offshore bank account, you must first decide exactly what your objectives are.
There are six primary benefits of opening an offshore account. First it increases the level of privacy you have concerning your financial matters. Second, it offers you investing options that are not available to you in your native country. Third, your financial security is greatly increased due to the international diversification of your portfolio. Fourth, your assets are safer through the secret nature and absolute privacy of offshore banks and the inability of people who would threaten your wealth to find or even know of its existence. Last, having funds offshore makes recovery of assets through lawsuits or seizures much more difficult – often impossible, as the laws of small tax-sheltering nations protect the wealth of their offshore clientele greatly and dramatically favor the individual investor.
You receive all these benefits automatically by opening an offshore account. Deciding which benefit is most important to you and how you want to use the account will determine the type of account, at which bank, and in what jurisdiction.
Privacy
If your primary objective is privacy, then the most important consideration is the jurisdiction, or country, where the bank is operating. The only way that you can be assured that your records are truly private is to bank in a jurisdiction that imposes and enforces the strongest banking privacy laws. The countries of Austria, Panama and St. Kitts and Nevis, are our recommendation to fulfill this as your primary objective – these nations do not fold under due to outside pressures. In fact, revealing banking information to third parties is a crime in Panama, punishable by imprisonment.
If one of your objectives in using an offshore bank is financial privacy you need to be careful of banks that may have reporting requirements in your country due to such an affiliation.
My firm has done extensive research in this area and can provide you with a list of jurisdictions that have the strongest banking and corporate privacy laws in the world. To receive this information free of charge, please drop me a note requesting our 2005 research paper “A listing of countries offering the most favorable and strongest banking privacy laws.”
Investing and Business
If investing and doing business from an offshore account is your primary objective then you will want a bank that offers higher rates of return on savings accounts, provides brokerage and investment services, deals in multiple currencies, and has merchant payment abilities.
There are advantages to having accounts in foreign currencies. If your original investment was US dollars, and the foreign currency (Euros, for example) grows stronger against your domestic currency, you gain the increase in value of the Euro against the dollar. If the Euro drops in value against the dollar, you may recognize a bigger return on your investment from the strength of the dollar’s purchasing power.
There are other benefits of banking offshore. Many countries encourage foreign investors in their jurisdiction by exempting them from paying taxes on money earned from sources outside of their jurisdiction, which makes some investments virtually tax free. But a little homework never hurts: you need to find out if the country taxes investments or interest income by foreign investors.
If you are going to operate your business from an offshore bank, there can be great financial advantages if it qualifies as a tax exempt investment. Here, too, you will want to choose a bank that is familiar with and offers a full line of business accounts.
Financial Security
Most important – and most common of all financial goals – is security, without it there is nothing else. So first, it is important to know the integrity of the government, the economy and court system in the country where you are planning to open the account. Look for countries that have legitimate, stable democracies, good relations with other countries world wide, a solid economy based on diverse production of goods and services, and a court system that does not fall prey to bribes and corruption.
Banking laws are also important. If a local jurisdiction is going to release asset and account information to anyone who comes calling, or honor a judgment against you issued by a court from somewhere else in the world–you are left virtually naked, void of real protection from lawsuits, proceedings and seizures.
Countries that enact and enforce strict laws concerning banks and banking in their jurisdiction, place you in far better position when it comes to protecting your money. This is especially true of countries that require all legal action to be originated in their own court system. If you have an action pending against you, this is a consideration when selecting an offshore account.
It is also important is to know the banking institutions that you deal with. You must assess their efficiency in service, as well as making sure they have a stable financial position with a strong assets to liability ratio. Again, it is necessary to do some homework. Having a personal relationship with the people on the other end of the phone or fax line is extremely advantageous–especially when you need that little extra bit of personal attention. To satisfy our clients needs, our firm travels extensively, to routinely meet face to face with the people we do business with, to see first hand their operations, and establish a working relationship with them.
With the aid of the Internet we have researched a multitude of websites that are dedicated to reporting on the activities of banking, finance and law worldwide. You can see the various jurisdictions we recommend, and a few that we don’t, on our website at www.redseamanagement.com.
What type of bank will best suit your needs?
A bank is merely an institution in the business of providing financial services. Financial services include a wide range of activities. Simple services like checking accounts to much more complex services like portfolio management and international lending are all part of a bank’s range of services. The banks that offer such services and have the highest level of proficiency in these areas are the institutions that you should seek to do business with. Your objectives will dictate what services you will be looking for in a bank.
In the past, one could often tell the type of services a bank would offer based on the type of bank or by its name. The lines between traditionally defined banking institutions have become blurred with the scramble to find new ways to attract new business and has become even more complex with the advent of internet banking. Here’s a look at how we traditionally defined banks, for banks often specialize in those areas in which they have always worked.
Commercial Banks
Traditionally, commercial banks were used chiefly to handle everyday financial transactions of businesses through demand deposit accounts and short-term commercial loans. In addition they buy and sell foreign exchange, gold or silver bullion; lend money against securities of personal property, and offer first mortgages on improved real estate and the insured improvements.
The largest and oldest of all financial institutions, commercial banks relied mainly on checking and savings accounts as sources of funds for loans to businesses and individuals. This category still tends to offer a wider range of services, more flexible loan programs, and caters more to businesses.
Savings Banks
Savings banks were traditionally institutions that primarily accepted consumer savings deposits, made home mortgage loans and did some general investing for specified purposes stated in their charters. They are also called mutual savings banks. These banks were more specific in the range of services they offered.
Private Banks
Traditionally private banking was reserved to service the wealthiest clients, meeting one on one with their bankers in posh surroundings to service their banking needs. Most private banks also offered investment counseling and portfolio asset management services.
Now most banks have some form of private banking, which designates a service unit that provides securities safekeeping, investment advice and lending. These services are offered to international, private, and institutional clients. Some of the larger banks will provide global private banking, some have security asset minimums ranging from $500,000 to $5,000,000.
Although there is a trend to offer “Free Services,” the bank must earn its income somewhere. You have to proceed cautiously when banks offer “private banking” or “relationship banking management” (a modern marketing term that means we want all of your money not just savings and checking.) It is more important to learn how the bank is structured than be impressed by a special term your banking partner uses when referring to your account. Not to say that one type of bank or account is necessarily more reliable than another, just to understand what the bank gains by offering personal attention.
Some banks are merely front ends for investment funds: how objective are they with your money? Private banking – when it is of an advisory nature and is not accompanied by lending or borrowing – we feel should be fee-based. But as long as the money involved is sufficient to justify the fee costs, an advisory private banking relationship is a good choice. It would be better to deal with a bank that is trying to make money out of private banking directly, rather than just using it as a marketing tactic to sell other products.
What questions should I ask?
Don’t make the mistake of shopping around for the best rates that are currently offered, there is a lot more to foreign banks than a name and a rate.
It is important to ask the right questions to qualify the bank. First off, in an international bank there should be someone at the bank who can speak your language fluently, whether it is English, French, Spanish or Chinese… and so forth. You should ask about accessing your accounts: do they offer a full range of Internet banking? Are debit cards accessible world wide? Which automated teller networks do they use? How long will it take to clear checks?
How are the funds held by the Bank? If they are held as part of the banks balance sheets they are subject to the bank’s creditors in case of insolvency. Of course it is important to read the fine print in the disclosure statement.
There are banks that offer no frills or freebies, just straight forward services with straight forward fees, and that’s how they earn their money. It might be better to deal with a bank that is structured like a bank and not an investment house. You can find out how various banks rate at www.fitfchratings.com. For the more serious, you can request our research paper, “20 Questions to ask before selecting a bank.” It’s free.
What services do I need?
Once you have established your priority list of objectives and know what jurisdictions will serve you best and the various banks in that country, you need to look at which type of account(s) best meets your needs.
As more banks begin to compete in the international markets there are a lot of similar, if not the same services, being offered by the majority of banks. Very often there will be several names which refer to the same type of account. Each bank should have a printed listing of all of the accounts they offer.
Types of Accounts
There are basically two major types of bank accounts, all the rest are variations. They are demand accounts and time deposits. A demand account is any account which the funds are available immediately on demand. Checking and standard savings accounts are examples.
Time deposit accounts are the other type of accounts: you open this type of account for a specific amount of time with the promise of a set return. There are usually severe penalties for early withdrawal of funds. Certificates of deposit (CDs) are an example of this type of account.
Investment accounts, money market and tiered interest accounts are variations using a combination of each of the two afore mentioned accounts. They are often tied to a specific investment medium such as stocks, bonds, precious metals, etc. as an index to determine the interest. It works offshore the same as it does at home, the longer the period of time and the greater the amount of money you deposit the better interest they will pay you.
You must decide how you will best use your offshore accounts. If you need the funds to be accessible at all times, for example to run your business, then you want to use a demand account of some form. If it is to safely tuck away your nest egg out of harms way then a more long-term higher-interest account might suit you better.
Opening the Account
Each bank will have an application form to fill out, and the applications are fairly standard. Worldwide banks are required to do a “due diligence” on all of their clients. The application will require at least a letter of reference from your current bank, a notarized copy of your passport, and an original utility bill with your name and address. If you are opening a corporate account they will require further documentation of the corporation.
There are several methods you can use to open the account, a wire transfer is the fastest and most common means, but you may also use checks, or cash. Depending on the size of the account, some banks prohibit the use of large sums of cash, however.
What does all this mean to me?
Once you have ascertained what your primary financial goals are, you can begin to make intelligent decisions concerning where best to go with your offshore banking needs.
There are great differences in the various jurisdictions world wide, from the tax structure, to the banking privacy laws, and you need to stay current: The US and the EU now have signed treaties with many of the formerly secure offshore jurisdictions, like The Bahamas. They now permit information sharing amongst them, thus destroying the ability of once strong offshore jurisdictions to maintain their status as legitimate offshore havens. It is because of this that you are often better off with the less well known and less popular countries that don’t attract so much attention.
Countries worth considering for their privacy laws and strict regulation of their banks as well as their stable independent governments are, Austria, Bermuda, Curacao, Denmark, Liechtenstien, Panama, and Switzerland. You can find out about the various jurisdictions our firm recommends on our website: www.redseamanagement.com.
When you will need to establish an offshore account, consider using several banks in different jurisdictions. In order to choose the best bank in the best jurisdiction to meet your objectives you could spend days researching the various jurisdictions and banks. But why would you want to? There are places to find this information handily, like our own RedSea Management website.
Closing Thoughts
Please understand that you are not opening an offshore account to get rich. It will, however, help you keep what you have already worked so hard to get, and possibly make you some money as well. Offshore banking is a tool to use as part of entire financial plan. Like any tool it will aid you greatly when used properly and with proper counsel. Like any other tool, a poor selection can cause you great hardship if used unwisely or without knowledge of its implications.
The basic formula is quite simple. By moving part of your wealth to an offshore jurisdiction you can increase your privacy, protect your money from those who seek to take it, and increase the return on your investments by broadening your investment options. By doing this you will hedge all your financial positions.
Don’t make the mistake of shopping around for the best rates that are currently offered, there is a lot more to foreign banks than a name and a rate.
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